Most REALTORS® advise their clients to pre-qualify for a mortgage before starting to shop for a home. Pre-approval of a mortgage happens once your lender has reviewed all your financial information and determined the maximum amount of money you can borrow.
The advantages of pre-approval include:
- Knowing how much you can borrow and what you can afford
- Current interest rate guaranteed for sixty to ninety days.
- Having an edge when you make an offer
- Saving time when you apply for your loan because you've already assembled your paperwork.
Where to get pre-approved:
Lenders include banks, trust companies, some credit unions and some private lenders. You can also consult a mortgage broker. Provided you're a good credit risk, financial institutions want your business and will compete for it. It is therefore to your advantage to shop around for a mortgage.
Once you've selected a lender, you will need to provide him/her with your financial information, along with the following:
- Number of dependents and marital status
- Details of employment, including a letter from your employer verifying your salary;
- Banking and investment information;
- Details of your assets (i.e., car, other property);
- Information on loans and other liabilities; and
- Permission to do a credit check
Arranging a Mortgage
A mortgage is a formal document by which the borrower (mortgagor) gives the lender (mortgagee) a lien on real property as security for a debt. The borrower has use of the property, and the lien is removed when the obligation is fully paid.
- Conventional Mortgage: lenders will loan you up to 75% of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation and you must come up with the remaining 25% down payment yourself.
- High-ratio Mortgage: If you don't have the 25% down payment, you would be provided with up to 95% (up to 100% with good credit) of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation. For more on this, visit CMHC's website.
- Variable-rate mortgages (or floating rate mortgages): are usually offered for both conventional and high-ratio mortgages. If interest rates climb, you will be paying more per month in interest; if rates drop, you will be paying more off your principal.
- Fixed-rate mortgages: maintain the same rate of interest over the entire negotiated term.
- Open mortgage: you can pay off as much of your debt as you wish, whenever you want, without penalty.
- Portable mortgage: A portable mortgage is one that can be transferred from your current property to the one you're buying next.
Different lenders may offer other features and options such as a convertible mortgage, blending and extending interest rates and interest rate buy down.
Government Incentive Programs
The Governments of Canada and Ontario recognize the importance of home ownership and have put a number of programs in place to help Canadians buy a home:
- Home Buyers' Amount
- RRSP Home Buyers Plan
- First-Time Home Buyer Incentive Program
- GST/HST New Housing Rebate
- Canada Greener Homes
Land Transfer Tax Rebate Program
First-time buyers of both new and resale homes are eligible for a refund from the provincial government of up to $2,000 of the land transfer tax paid. More information regarding eligibility requirements and other details can be found on the Ministry of Finance website or you can call the Ministry of Revenue at 905-433-6361.
These payments include:
- Legal fees: for work provided by lawyers, notary publics.
- Mortgage loan insurance: typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect the lenders against mortgage default, and enable consumers to purchase homes with little or no down payment. Visit the CMHC website for more information.
- Appraisal fee: If your loan is not insured, your lender may require a property appraisal at your expense.
- Property/fire insurance: This insurance covers the replacement value of your home and its contents.
- Home inspection
- Renovation and repairs
- Survey fee: Lenders will want proof that the property complies with all relevant by-laws and that new additions fall within the property's boundaries.
- Title Insurance is an insurance policy to protect your investment in your property if there is a problem with title.
- Property taxes
- Land transfer tax: A land transfer tax is assessed on real property when ownership of the property is transferred from one party to another. The tax is a certain percentage of the value of the property based on a sliding scale.
Market value, according to the Appraisal Institute of Canada (AIC) is, “the most probable price in terms of money which a property should bring in, in a competitive and open market, under all conditions required to a fair sale. Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and each acting in what he considers his own best interest;
- A reasonable time is allowed for exposure in the open market;
- A payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto.”
Market value is not to be confused with selling price. In the best of all possible worlds, market value tends to align fairly closely with selling price, but that may not always be the case. How then do professionals determine market value? Well, they can't determine it, but they can estimate it, using as their basis successive selling prices in comparable homes.
For example, an appraiser trying to estimate the market value of a home would analyze the neighbourhood and identify the three most pertinent properties that sold within the immediate area over the past few months through arm's length transactions (i.e., not through "undue influences", such as a transaction that might take place as an inter-familial transaction or through Power of Sale). Given their selling prices, he or she would then make various adjustments to the properties in order to estimate the subject's market value. The REALTOR® then estimates the approximate value of each adjustment.
Property Sales Price
Adjusted Sale Price
Based on these adjusted sales prices and other factors and using the direct comparison approach, the appraiser would then come up with a market value for the home in question in a range between $685,000 to $695,500, most probably $690,000.
What is an appraisal?
An appraisal is a report containing information relevant to independent property valuation, including the purpose of the appraisal, other qualifying conditions, neighbourhood conditions, property identification, data analysis, the value estimate and the effective date of the appraisal. All reports are also signed and may contain support material such as maps, charts, or photographs.
All reports will demonstrate either one or more of the three basic data-processing methodologies used to arrive at an indication of value:
- The Cost Approach estimates the cost of building a new property identical to the subject being appraised, based on current prices and subtracting accumulated depreciation and adding the estimated land value. This approach is seldom relied upon as the cost of vacant land in older, established neighbourhoods is non-existent. Also, depreciation can also be very difficult to determine. Most financial institutions still require this approach, but it is very seldom used by a prospective buyers or sellers.
- The Income Approach may be used for income-producing properties (4plex and up properties) and is based on the theory that value is the present worth of the income stream the property is capable of producing when developed to its fullest use. The net operating income from the property is capitalized into value by the appropriate method and rate.
- The Direct Comparison Approach is based upon the theory that an informed purchaser would pay no more for the property than the cost of acquiring another existing equivalent property. The value estimate is based on the selling price of comparable properties.
For a directory of AIC Members, you can go to the website of Appraisal Institute of Canada.
This information is provided by the London and St. Thomas Association of REALTORS®. The information herein is believed to be accurate and timely, but no warranty as such is expressed or implied.